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Appraised Value vs. Market Value

[dropcap]W[/dropcap]hat is the value of your home? It’s a question with an answer that’s not as straightforward as you might imagine. A home really has two important kinds of value: an appraised value and a market value.

Think of a home’s appraised value as a theoretical value. The market value, in contrast, is influenced more by what a buyer might actually be willing to pay.

Real estate appraisers tend to think of homes in terms of the value of neighboring homes. Comparing the final sale prices, size and features of nearby homes is one broad way to value a home. The actual market value of your home — or the amount that it is likely to sell for in a transaction — can be very different. The gulf between these two values can be wide. Knowing the difference is critical to understanding your home’s true worth.

A Tale of Two Streets

Clients of mine recently had an appraisal completed when they took out a cash-out refinance. When they decided to sell, they believed the home would sell for the appraiser’s determined value ($580,000). My estimate of what the home would sell for (the market value) was much lower than the appraised value — by $70,000. Why? The home faced a busy street with few high-end businesses. The appraiser, unable to find comparable sales on the same busy street, had used sales on the next streets over. That quiet, tree-lined area was much more insulated from the noise and traffic of the busy commercial area.

I had a hard time convincing the sellers that their home would sell for the appraiser’s estimate. I suggested listing it at $450,000 and let the market bid it up to $510,000. We met in the middle and listed the home at $500,000. There was some interest, as the home looked appealing in the professional pictures and 3D WALKINTOUR. But when potential buyers visited in person, they were turned off. They didn’t like the busy buzz and the hum of traffic. Eventually my clients heard enough feedback about the busy street that they came to realization the home wouldn’t sell for $580,000 and reduced the price slightly below $500,000. Eventually we were able to find a buyer at the $500,000 range. Had we listed the home for $450,000, I’m confident that market competition would bid it up to the $510-$520,000 range.

On-the-Ground Knowledge

The important thing to understand about appraisals, especially those performed for the purposes of a cash-out refinance, is that the appraiser knows the intended purpose. This might lead him to inflate the number somewhat to help homeowners qualify for the cash they need. It’s a much different process than a comparative market analysis. This is a process in which a Realtor looks at more than just factors such as square footage, bedrooms, bathrooms and lot size. A skilled Realtor knows the issues that actually cause buyers to be reluctant to make an offer on a home. This includes many buyers’ hesitance to buy a home facing a busy street. Some buyers might be adventurous and unfettered by the setting, but many aren’t so comfortable.

Likewise, some buyers will be hesitant to by a home in which a death has occurred. California law requires sellers to disclose deaths in the home in the three years prior to a sale. Appraisers do not adjust for this factor. Not all buyers will be turned off by this situation. It could, however, reduce the pool of potential buyers, and thus lower the price for which the home ultimately sells.

If my client’s home on a busy street had been located a block over on the quiet, tree-lined streets, the appraisal might have been closer to representing the home’s true market value. The expertise of a good Realtor, preferable one who knows the area well, however, can be invaluable in setting a listing price that is reasonable in the real world. A Realtor who’s on the ground, talking to buyers and sellers every day in the neighborhood, knows what sells and what lingers on the market. They see the home through a buyer’s eyes and raise the same issues potential buyers will likely raise.

Trust in your Realtor

An appraiser is not nearly as invested in the sale of your home as your Realtor. To an appraiser, the value of your home is entirely on paper. It is, however, your Realtor’s job to foresee potential issues with the sale in the real world, and to provide you with as much information as possible. Your Realtor is looking out for your best interests.

As with many things in real estate, values can be hyper-local. At the CalAgents, we pride ourselves on our knowledge of local markets at the street level and our ability to give sellers every advantage in knowing the value of their home.